Understanding Grocery Industry

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Understanding the Grocery Industry


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The purpose of this memo is to help CDFIs deelop a basic understandin! of the "#S# !rocer$ industr$ b$escribin! the "#S# !rocer$ industr$, includin! ma%or participants, industr$ &nancials, current operatin! trends,nd industr$ trends# The "#S# !rocer$ industr$, 'hich includes a ariet$ of businesses from supermar(ets andonenience stores to 'holesale clubs and superettes, had sales totalin! oer )1 trillion in 200*, 'ithupermar(ets accountin! for %ust oer half of total sales at about )++ billion -1.# The supermar(et industr$omprises the lar!est se!ment of the "#S# !rocer$ industr$# /onsupermar(et !rocer$ sales are comprised mainl$f conenience stores, about )32+ billion, and 'holesale clubs, about )11 billion# hile this section focuses onhe supermar(et industr$ includin! traditional supermar(ets, limited assortment supermar(ets, superettes,upercenters!rocer$ onl$, other store formats should be considered 'hen anal$4in! the industr$ to determineompetition and appropriate store t$pes or si4es in the under'ritin! process# 5asic descriptions of !rocer$ndustr$ store formats include:

Traditional supermarkets: Traditional supermar(ets, also called conentional supermar(ets, are selferice retail stores that sell dr$ !roceries, canned !oods, nonfood products and perishables hain! annual salesf )2 million or more# These stores t$picall$ carr$ bet'een 1+,000 and 60,000 stoc( (eepin! units -S7"s. andend to hae multiple serice departments includin! but not limited to ba(er$, butcher, deli, &sher$, 8oral,harmac$, photo, etc# Traditional supermar(ets ar$ si!ni&cantl$ in si4e but t$picall$ ran!e bet'een 20,0009uare feet -SF. and 6+,000 SF;

Limited assortment supermarkets:


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onsumer interests# For eGample, accordin! to the Food Har(etin! Institute, a ast ma%orit$ of stores no'?er prepared foods for ta(eout and hae 8oral departments in response to customer needs# Supermar(etsre also increasin!l$ o?erin! ethnic foods and or!anic and natural foods -1.#

n the past, food retailin! 'as er$ personali4ed, 'ith shop o'ners liin! 'ithin the nei!hborhood 'here the$perated# s people started moin! to suburbs from cities durin! a lar!e part of the last centur$, retailersollo'ed them# This led to !ro'th in the number of shoppin! centers and to the be!innin!s of supermar(et chainsales practices also became complicated as operators 'ere far remoed from their customers and had to pa$ foresearch to understand their customers needs -1.#

Toda$, supermar(et operations include purchasin! products from a number of suppliers, hain! productseliered to the store, maintainin! the products freshness, mar(etin! the products, and completin! saleshrou!h chec(out stations -1.# Supermar(ets !enerall$ hae lon! hours of operation to meet the needs of their

lienteles ar$in! schedules# n important piece of this business is the operators decisions on productssortment, 'hich must satisf$ their customers needs#

Those 'or(in! in the supermar(et industr$ monitor four economic indicators: disposable consumer income,onsumer con&dence -as measured b$ the Consumer Sentiment IndeG., interest rates and population !ro'th -1.#

hen consumers hae more disposable income, the$ ma$ purchase branded or !ourmet t$pe food as opposed to'hen the$ hae less disposable income and tend to trade do'n to purchase onl$ staples or cheaper options#hen consumer con&dence is lo', consumers tend to spend less, as seen in the retail industr$ as a 'hole#nterest rate moement a?ects the industr$ in a manner counterc$clical to disposable income# hen interestates are hi!her, consumers hae less discretionar$ income and ice ersa# Finall$, population and populationro'th in a particular area help determine 'here to locate stores and ho' man$ to operate# The latter 'ill be aea$ focus in an$ mar(et or demand stud$ for a supermar(et retailer#

The supermar(et industr$ is !enerall$ nonc$clical in lar!e part because the stores sell staple products -food.,'hich ma(es the industr$ more resilient than other retailin! sectors# Jo'eer, the industr$ is c$clical 'ithespect to sales around ma%or holida$s and acations 'hen sales tend to increase and decrease respectiel$#

Table 1 belo' presents supermar(et industr$ aera!es on a per store basis# s sho'n, reenues haencreased sli!htl$ oer the last three $ears 'hile the aera!e sellin! area and number of fulltime e9uialentmplo$ees has decreased, portra$in! the industr$s focus on eKcienc$#

ditional or !onventional Supermarkets& -16. '(() '((* '((+ '(#(

Annualales Lolume -) millions. Sellin! rea -s9uare feet. /umber of Chec(outs FTM Mmplo$ees

,eekly

ales Per Store Sales Per S9uare Feet) 1+#31 ) 1+#>6 ) 1+#6> ) 1+#+ 33,2+0 33,2+0 33,300

*#3 *#6 *#6 *# 6* 666


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) 2*,30 ) 300,6* ) 2**,33 ) #> ) #*> ) *#0+ ) #*>

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The top ten retailers in the supermar(et industr$ accounted for approGimatel$ 6@ of total industr$ sales in00* -1.# The table in Appendix II – Major Participant Details, o?ers some details on the top ten supermar(ethains b$ sales includin! their number of stores, top banner names and chief tradin! areas# /ote, these chainsnl$ account for sli!htl$ more than onethird of the number of supermar(ets in the "#S# 'ith the balanceonsistin! of numerous other public and priate operatin! companies#

The U-S- Grocery Industry . Industry Financials

This section proides a broad oerie' of some industr$ &nancial data# Since industr$ &nancial data is deriedrom arious sources, the follo'in! focuses primaril$ on the ma%or participants and all other companies includeds one !roup# The industr$ metrics in this section di?er from those one 'ould 'ant to consider 'hen reie'in! a

in!le operator in depth because indiidual companies ma$ include di?erent eGpenses or reenues in arious linetems, and the comparison on the industr$ leel 'ould not be apples to apples# For eGample, some companiesnclude frei!ht costs and 'holesaler rebate pa$ments in Cost of Noods Sold -C=NS., and others simpl$ include theost of inentor$; thus, the !ross mar!in calculation --Sales O C=NS.ESales. 'ill re8ect er$ di?erent !ross

mar!ins, een if the sales and inentor$ costs of the t'o operators are er$ similar# The industr$ metrics reie'edere are ones 'here the data is comparable for all of the companies E operators in the industr$# dditionall$,ome compan$ speci&c ratio data is presented at the end of the section to proide industr$ trends and ran!es#

The chart aboe portra$s an industr$ brea(do'n b$ number of supermar(ets includin! the ma%or participants -topen chains b$ annual sales. and all others# s sho'n, the ma%or participants account for about 3+@ -12,+1tores. of the total number of supermar(ets or 3+,612 stores, 'ith alHart and 7ro!er leadin! the 'a$ alHarts a supercenter but onl$ its !rocer$ sales are considered in this industr$ summar$#

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Chart 2 belo' portra$s the percent of total supermar(et sales b$ ma%or participants and all others combined# shis chart describes, all other supermar(ets that account for 6+@ of the total number of stores onl$ account for2@ of total industr$ sales# This chart also describes alHarts mar(et share as a percent of sales at anstoundin! 2@ 'ith its closest competitor, 7ro!er, hain! onl$ an 11@ mar(et share#



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s Chart 3 belo' describes, the ma%or participants aera!e hi!her sales per store than the nonma%ors andndependents# The aera!e annual sales for nonma%ors and independents 'ere )# million per store -)1+0,000er 'ee(. 'hereas 7ro!er stores aera!ed about )2+ million per store -)>0,6* per 'ee(. and alHart storesera!ed about )+> million -=er )1mm per 'ee(.#

Charts > and + belo' portra$ the number of chain stores and independent stores b$ annual sales ran!e# Chaintores comprise nearl$ t'othirds of the mar(et and tend to be lar!er than independent operators# s is sho'n inhe charts belo', there are more chain stores that do !reater than )30 million per $ear in sales than there arendependent stores alto!ether# Furthermore, about +,00 of the 6,300 independent !rocers hae annual sales inhe )2 million to ) million ran!e#

Understanding the Grocery Industry Understanding the Grocery Industry


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Charts 6 throu!h present a fe' pro&tabilit$ and asset mana!ement ratios releant to the supermar(et industr$#These charts portra$ &e$ear trends for &e selected companies: 7ro!er, Safe'a$, Superalu, PubliG, and holeoods# These companies 'ere selected because of their di?erent scale, strate!ies and !eo!raphic distribution,nd o?er some insi!hts on the industr$ as a 'hole#

Chart 6 aboe displa$s reenue per emplo$ee# s sho'n, reenue per emplo$ee has been increasin! sli!htl$er the last &e $ears and currentl$ ran!es from about )1+0,000 to )2+0,000 per emplo$ee# 7eep in mind thathe industr$ has been sli!htl$ decreasin! the number of full time e9uialent emplo$ees in recent $ears#

n 200, the industr$s aera!e return on assets increased to +#+@ from >#63@ the prior $ear -11.# Chart elo' presents return on assets for these companies# s sho'n, return on assets has been !enerall$ecreasin! oer this period and currentl$ ran!es from @ to about 13@#


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Chart aboe displa$s the &e$ear earnin!s before interest, taGes, depreciation, and amorti4ation -M5ITD.mar!ins for &e companies# =erall, there has been a sli!ht decrease in M5ITD mar!ins oer this periodCurrentl$, M5ITD mar!ins are sho'n to ran!e from 2@ to about *@#



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The U-S- Grocery Industry . /perating Trends

Cost control is eGtremel$ important in this lo'mar!in business 'here stron! and 'ea( pla$ers ma$ be decided$ a mere 1@ di?erence in net mar!ins# Product costs !enerall$ account for 0 to 3 cents for eer$ dollar ofales, thus sharp chan!es in food in8ation can hae a si!ni&cant impact on pro&tabilit$ -1.#


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Total pa$roll

Mmplo$ee bene&tsPropert$ rentalsDepreciation B

amorti4ation

"tilitiesSuppliesHaintenance and repairs

TaGes and licensesInsurance=ther eGpenses

Total operatin! eGpenses

C=NS

Pro&t


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Huch of the marketing data used b$ supermar(et retailers is deried from the P=S scanners and shoppero$alt$ cards -1.# From these sources, retailers can !ather and anal$4e data related to demo!raphics, fre9uenc$f shoppin!, purchasin! habits, !eo!raph$, and other ariables# Then retailers can se!ment their tar!et

mar(ets and determine 'hat techni9ues to use to increase shoppin! fre9uenc$ and pro&ts#

ndustry Trends

The 'ea( econom$ in 200* and 2010 has led to increased sales and mar!in pressure for food retailers# =er00*, real NDP dipped 2#>@ and unemplo$ment pea(ed at 10@ -1.# These conditions made consumers morerice sensitie, 'hich resulted in:

Increased sales of priate label !oods; and,

Increased shoppin! at 'arehouse and discount club stores#

Consumers also shifted their habits oer this period as the$ chose to prepare more meals at home as opposed toatin! out, leadin! to increased reenues for food retailers# Finall$, pricin! competition intensi&ed as retailersried to lo'er pricin! durin! the 'ea( economic times and increase brand lo$alt$ in anticipation of 'henonsumers start to trade bac( up to hi!her priced items#

ince the entrance of nontraditional operators into the mar(et, competition has increased tremendously #/ational, re!ional, local, and independent chains compete a!ainst each other as 'ell as a!ainst specialt$ foodtores and mar(ets, 'arehouse clubs, dru! stores, conenience stores, discount clubs and others -12.# alHartnd Costco, 'hich are considered superstores and 'arehouse clubs, compete a!!ressiel$ hain! sales of about130 billion and )> billion in 2010, respectiel$# Increased competition ma(es it diKcult to maintain paperthin

mar!ins, as do risin! costs and a saturated product mar(et#

Private label brands hae boomed durin! the recession and hae closed the !ap on ma%or label brands b$ompetin! on price and shelf space# This is in lar!e part due to price but consumer con&dence in the 9ualit$ ofriate label products has also increased -12.# Some chains hae een deeloped hi!hpro&le priate labelrands#

merican consumers are demanding organic products due to shiftin! trends in health and nutrition# This iseadin! to increased industr$ reenues since or!anic products are more eGpensie than traditional products# Therice !ap bet'een or!anic and nonor!anic is eGpected to decline as or!anic purchasin! increases and farmscale up to meet demand# s described in Appendix I -Major Participant Details, nearl$ all of the ma%orupermar(et chains are increasin! their e?orts to increase the amount of health$ foods sold; increasedurchasin!, ne' mar(etin! techni9ues, and store redesi!ns are a fe' of the techni9ues bein! implemented#

ecent report broadcast on /P hi!hli!hts a fe' of these techni9ues and 'h$ operators are en!a!in! in mar(etin!ealth$ foods; one reason is to decrease the amount of 'asted fresh produce -13.# =perators are positionin! freshroduce front and center and are usin! subtle li!htin! chan!es to hi!hli!ht the healthier food options as 'ell asdertisin! these products more heail$ -13.#

nother si!ni&cant issue facin! the industr$ is credit and debit card interchange fees, 'hich haencreased b$ as much as 00@ oer the last ten $ears -12.# Interchan!e fees are related to fraud rates,ransaction olume, processin! costs, and other ris( factors#

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Consumer data analysis is becomin! crucial as competition increases# Han$ retailers alread$ collectonsumer data throu!h lo$alt$ shoppin! cards# To improe on this data, man$ retailers are loo(in! to outsiderms that can better or!ani4e and subdiide the data for more eKcient use in mar(etin! pro!rams -1.#

Product assortment strategies hae also shifted to reducin! S7"s# educin! S7"s helps eGpand sales ofi!her mar!in priatelabel !oods, improe cost controls, improe inentor$ control and aid in hain! a moretreamlined product presentation that can improe the shoppin! eGperience and boost the aera!e bas(et si4e1.#

nother recent trend is the convergence of supermarkets and drugstore business models # hile it isnli(el$ that these t'o industries 'ill completel$ coner!e, each is attemptin! to attract the others customerase# For eGample, al!reens and ite id are attemptin! to sell more fresh food and !rocer$ !oods, 'hile al

Hart and PubliG hae been eGpandin! pharmacies and o?erin! clinical serices -1>.# lon! the same lines, al

Hart is plannin! an a!!ressie rollout of smaller store formats located in urban areas in an attempt to boostlu!!ish "#S# sales !ro'th rates and compete 'ith dru!stores and smaller supermar(ets -1+.# These stores areGpected to be about 20,000 s9uare feet and o?er a ariet$ fresh produce# alHart has been conductin! a pilottud$ 'ith four, 1+,000 s9uare foot Marketside stores since 200# This deelopment has alread$ started to !arnerompetition as Tar!et Corp# is plannin! a similar strate!$ -1+.#

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Industry Terminology

!ategory 3anagement O retailer or!ani4es the products the$ carr$ into distinct !roups or !roups of relatedroducts -i#e# deter!ents, health and beaut$ aids, or!anics, etc#.# Mach !roup is reco!ni4ed as a productate!or$ and is run li(e a mini business# retailer 'ill monitor a cate!or$s sales, !ross mar!ins, and 'hetherr not that cate!or$ is addin! to the bottom line or not# Cate!or$ mana!ement is the mana!ement of all ofhese minibusinesses# For eGample, a !rocer$ retailer ma$ choose to ma(e produce or bananas a lossleaderate!or$ price the bananas at or belo' 'holesale cost in order to incentii4e customers to shop in their storeer a competitor 'ho sells similar items#

!entral 4illing O 'holesaler contracts 'ith other produce 'holesalers, dairies and meat producers to bill theirmutual supermar(et customers under one s$stem in instances 'here products are not aailable from the'arehouse#

!oding O s$stem of identif$in! each products department to trac( !ross mar!in and inentor$#

!onsumer Sentiment Inde2 a monthl$ report published b$ the "niersit$ of Hichi!an# It measures aonsumers outloo( on the oerall econom$ and ones o'n &nancial position# If a consumer ie's the econom$s faorable, there is a hi!her probabilit$ that more !oods and serices 'ill be consumed# Conersel$, a lo'erutloo( on the econom$ 'ill cause more consumers to sae#

!oupons O Acents o? adertisements aailable to consumers throu!h the print medium# The retailer reduceshe retail price of the product b$ the amount of the coupon discount# The retailer is reimbursed b$ the

manufacturer 'hen the coupon is returned#

!ustomer Loyalty !ard O customer lo$alt$ card is a paper or plastic card 'hich identi&es a card holder as amember of a retailers customer lo$alt$ pro!ram# lo$alt$ pro!ram is one of the man$ mar(etin! tools that aetailer ma$ utili4e# retailer ma$ use information !athered from scannin! lo$alt$ cards into the P=S s$stem toirectl$ tar!et or mar(et to consumers to incentii4e them to purchase an item more fre9uentl$, in hi!heruantit$, or a related item# For eGample, a customer lo$alt$ card holder ma$ purchase a pac(a!e of diapers andhe retailer ma$ proide a coupon for bab$ 'ipes on the bac( of the customers receipt# lo$alt$ pro!ram is also merchandisin! or cate!or$ mana!ement tool for retailers that assists them in understandin! their consumersreferences; this information can be used to mana!e cate!ories more e?ectiel$ and increase pro&tabilit$#

$ark Store . retail commercial space that has been acant for an eGtended period of time# These stores'ere once full$ operational and thriin!#

Lottery !ollections O Stores in states in 'hich a lotter$ operates can ma(e a si4able income from tic(et sales#

Collections represent the sales that are held b$ the !rocer but pa$able to the state commissioner on a 'ee(l$asis#

3arket Study research tool used to anal$4e attributes of a !ien mar(et for a particular product need#

0oint o1 Sale System %0/S& . point of sale s$stem is a retail chec(out s$stem# It is often used to describehe place in a store 'here the customer pa$s for their !oods, althou!h the P=S actuall$ refers to the hard'arecash re!ister, scanner. and soft'are that enables the transaction to occur#

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Sales per Transaction O a (e$ measurement of reenue !eneration# If the sales per transaction decrease,he retailer needs to increase either the si4e of each sale or the stores traKc#

Scanners O e9uipment used at the cashier to read prices automaticall$# Slotting Allo5ances O discounts

roided b$ the manufacturer throu!h the 'holesaler as an inducement to the !rocer to place products faorabl$

n sheles#

Shrinkage O inentor$ reductions caused mostl$ b$ theft or spoiled !oods# For eGample, if a shopper drops a %arf

ma$onnaise, the !rocer does not char!e him or her for the loss; rather, the loss is eGpensed# S6U . S7"

tands for stoc( (eepin! unit, a uni9ue identi&er for each product a business o?ers# traditional

upermar(et carries bet'een 1+,000 and 60,000 S7"s or di?erent products#

Target market a sub!roup of the oerall mar(et usuall$ se!mented b$ !eo!raph$, demo!raph$ andEor

fest$le preferences# Trade area O the icinit$ from 'hich a retailer !ets a ma%orit$ of its consumer base#

,holesaler a distributor of !oods in lar!e 9uantities sold mainl$ to retailers 'ho resell to indiidual users#

Sorces! "1#, "1$#

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Appendi2 II 3a7or 0articipant $etails Ta"le ' Top #( Supermarket !hains . '((+

-1.

The follo'in! sections describe details of the siG lar!est participants operations and current business strate!ies#This proides bac(!round information about some di?erences and similarities amon!st them such as !ro'th,emodelin!, numerous banner names ersus onl$ one of a fe', sustainabilit$ initiaties and so on#


!ompany

Num"er o1 Stores 8st-

Annual Sales

Top 4annerNames

!hie1TradingAreas inU-S-

,al93artStores

2,*06 )1+>,2>,*00,0

00

alHartSupercenter-2,>. alHart/ei!hborhoodHar(et -1+2.

Har(etside ->.

South-1,+6.Hid'est->3.est-3*.

6roger!o-

2,>0 )62,60,260,00

0

7ro!er -1,2++.alphs -23+.Fred He$er-12*.

est-*.South-2*.Hid'est-6+3.

Sa1e5ay Inc-

1,>6 )3+,022,260,00

0

Safe'a$ -*++.Lons -2>*.Dominic(s-.

est-1,11.South-2>6.Hid'est-6.

Supervalu Inc-

1,+16 )31,>60,2,00

0

lbertsonsESuperalu ->>.Saea./ortheast -362.

AholdUSAInc-

0 )2>,102,000,00

0

Stop B Shop-3*. NiantFoodE.

/ortheast -+11.South-1*.

0u"li2

Super3arkets Inc-

1,012 )

21,6>+,000,000

PubliG -1,00+.

PubliG Sabor->. PubliGNreenise -3.

South

-1,012.

$elhai;eAmerica Inc-

1,60> )1,,120,00

0

Food *.Jannaford-11.

South-1,>1*./ortheast -1+.


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,al93art Stores Inc-

alHart is the lar!est retailer in the "#S# and has been !ro'in! mar(et share in the supermar(et industr$ inecent $ears primaril$ thou!h its supercenters# alHarts !rocer$ reenue !re' to about )1++ billion in 200* orli!htl$ more than 2+@ of the supermar(et industr$s total reenue -1.# alHarts dominance is lar!el$ deriedrom its eer$da$ lo' pricin! strate!$ and continual s9uare foota!e eGpansion# alHart is (no'n for leera!in!ts si4e 'ith manufacturers in an e?ort to (eep prices lo' as 'ell as inestin! in technolo!$ to mana!e inentoriesnd distribution#

alHarts current strate!$ includes:

Slo'in! "#S# eGpansion to focus on remodelin! eGistin! stores and increasin! same store sales -2.;

emodelin! aimed at improin! the customer shoppin! eGperience -2.; ands part of its ASustainabilit$ 360 initiatie, alHart recentl$ announced that it 'ould be focusin! on

mall and medium farms in an e?ort to reitali4e rural communities and reduce the enironmental impacts ofarmin! -3.#

6roger

7ro!er is the second lar!est food retailer in the "#S# 'ith oer )62 billion in sales in 200* and 2,>0 supermar(etsn operation in oer 30 states# 7ro!er has four di?erent supermar(et formats -combination food and dru! stores,multidepartment stores, mar(et place stores, and price impact 'arehouse stores. operatin! under 22 di?erentanner names:

5a(ers 7ro!er Dillons Har(etplace Cit$ Har(et ='ens Fr$s Har(etplace Dillons Pa$ .#

Sa1e5ay Inc-

afe'a$ Inc# is one of the lar!est food and dru! retailers in /orth merica# In the be!innin! of 2010, Safe'a$perated 1,2+ stores in the estern, South'estern, oc($ Hountain, Hid'estern and Hidtlantic re!ions of the

"nited States and in estern Canada -+.# To support its stores, Safe'a$ operates an eGtensie net'or( ofistribution, manufacturin! and food processin! facilities -+.# Safe'a$s operatin! strate!$ is to proideutstandin! alue to its customers b$ o?erin! a uni9ue shoppin! eGperience, includin! maintainin! superior storetandards and a 'ide selection of hi!h 9ualit$ products at attractie, eer$da$ prices -+.# Throu!h its


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i!h 9ualit$ meat and produce, instore ba(eries, deli and food serice areas and outstandin! 8oral andharmac$ departments#

or the last seeral $ears, Safe'a$ has transformed its stores into A0,000 to +0,000 itemsnd aera!e in si4e from >0,000 to 60,000 s9uare feet -.# Jard discount food stores include Sae


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hold is an international food retailin! !roup 'ith a si!ni&cant presence in the "#S# primaril$ alon! the Mast Coastnd in the Hid'est, operatin! in %ust oer 00 locations# In the "#S#, hold operates under the banner names Stopnd Shop, Niant


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Documents

Understanding Grocery Industry